Turnabout: Goldman Sachs Is Now Bullish on America

On Main Street, Goldman Sachs (GS)has been paraded as an example of conflicted interests and shady dealings that resulted in a famous vampire squid comparison. But the firm retained its status in the financial world as a cut above the rest on Wall Street.

A penchant for sober, hard-nosed analysis even as rivals got carried away helped distinguished Goldman. That caution helped the firm flip its positions and profit from the real estate meltdown even as other banks were left holding the bag.

And it's for that reason that Goldman's bearish stance on the U.S. economy even as other Wall Street stalwarts turned bullish carried special weight. The contrast in views was personified over the summer by the starkly different stances taken by Morgan Stanley (MS) Chief Economist Richard Berner and his counterpart Jan Hatzius at Goldman.

While Berner predicted a strong rebound, Haztius emphasized the potential for a deflationary spiral amid a sluggish recovery.
"Demand Is Now Accelerating Sharply"

But in a rare turn of events, it's now Goldman Sachs that's throwing in the towel on its downbeat view following a wave of strong U.S. economic data. In a note to clients on Wednesday, the firm increased its GDP growth targets from 2% to 2.7% in 2011 and to 3.6% the following year.

Like bond giant Pimco -- which popularized the "new normal" view of the economy -- Goldman had long argued that anemic demand would weigh on any recovery as households focused on paying down debts. But after a sharp downturn 2007 and stagnation until the middle of 2009, Goldman has changed its tune, saying "underlying demand is now accelerating sharply" and is currently on pace to grow at a 5% rate in the fourth quarter.

"This outlook represents a fundamental shift in the thinking that has governed our forecast for at least the last five years," Goldman economists wrote. "Five years ago, we became very pessimistic about the U.S. economic outlook."

Housing Is a Wild Card

But "recent data reveal a firmer trend in domestic final demand and suggest that it will be sustained via improvements in net hiring and credit availability," Goldman says. Accommodative policy by the Federal Reserve along with mounting chances that tax cuts will be extended should add to the tailwind, the firm notes.

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Goldman still expects unemployment to remain at a historically high level of 8.5% at the end of 2012. And it notes that another major downturn in the housing market could imperil any economic recovery.

As Goldman plays catch-up to Morgan Stanley for once, investors should note that the latter has been taking an even more bullish position on the U.S. economy. In November, Morgan Stanley analysts revised their forecast for fourth-quarter GDP growth to 3.5% from 2.5%. They also calculated that October's job additions may actually have been as much as 240,000, much more than the reported 151,000 that already exceeded all Wall Street estimates.

Given Goldman's overall track record, bullish investors should be happy to have its endorsement.